CMGI chief: 'real Y2K bug' was financial

The market downturn in Internet stocksis 'a different type of millennium bug' caused by the US government injecting additional money into the banking system out of concern for a run on banks in wake of possible Y2K computer failures, says an expert.

          Speaking largely in line with what is becoming the prevailing view among market watchers, business leaders and, yes, venture capitalists, CMGI chief executive officer David Wetherell said business fundamentals and a clear path to profitability are key to success in the Internet economy.

          Wetherell largely absolved the investment decisions of venture capital companies of blame for the market downturn in Internet stocks in his keynote address at the Internet World trade show in New York. He said the downturn is "a different type of millennium bug," one caused by the government injecting additional money into the banking system out of concern for a run on banks in wake of possible Y2K computer failures.

          "The real Y2K bug ended up being the government trying to prevent a run on the banks," he said.

          The increased liquidity gave venture capitalists more money to fund new companies, and market valuations associated with the Internet reinforced the moves, he said.

          Since the beginning of the year, many of the bellwether stocks for measuring the Internet market have fallen dramatically. Even Wetherell’s own CMGI, an Internet investment and management company that either has bought or built several start-up Internet companies, lost 85 percent of its market value.

          In response to a question, Wetherell said he did not believe that venture capital companies were responsible for helping to bring stock valuations down.

          "They are responsible to their shareholders." Wetherell said. "The market was rewarding long runways (time to profitability), and they would have been irresponsible not to respond to that. "

          "I think the venture capital people have to take some responsibility for what happened (to share valuations)," said Krister Ragnarsson, a principal with Stockholm-based Kuzu Venture Intelligence, which advises venture capital companies on investments. "A lot of these venture capital companies put money into companies, and said they would follow, support the companies through different milestones, but didn't, and pulled back before their companies could hit these milestones. And then it's like, when one person says something, a lot of other people start saying and doing the same things. The institutional investors, venture capital people start pulling back, and then everyone else does."

          CMGI reorganized its diverse holdings into five separate business branches; search and portals, infrastructure and enabling technologies, Internet professional services, interactive marketing, and e-business and fulfillment. CMGI also has a venture capital business, CMGI AtVentures. The market downturn has forced CMGI to postpone taking what may be its most well-known business public -- search engine company AltaVista Co.

          Still, the necessity and the potential of the Internet has been the rallying cry for speakers at the show. "The good news is plentiful,” said Wetherell. “I’m not just here to be wearing rose-colored glasses for the industry."

          As an example, he used another CMGI company -- uBid Inc. -- to demonstrate the ability to find growth and profit online. He said one computer in 200 is sold over uBid's auctions. After a deal with Hewlett-Packard Co. is completed, he said that twice as many computers will be sold online at uBid. Up until recently, most of the computers sold online were "remainders" or older model computers, but with the HP deal, uBid would start selling the latest hardware.

          He said his company’s venture arm will look to fund companies with a clear path to profitability. Successful companies, he stressed, will heed changes in the way people access the Internet, as consumers begin to use devices other than personal computers to go online. For example, edge-of-the-network problems -- getting bandwidth out to mobile users -- must be addressed, he noted.

          He said startups should address big technology problems, achieve strategic alliances quickly, and that technical smarts trump managerial ability. "We're looking for great technology first and great management second," Wetherell said. "It's easier to add the latter than the former."

          CMGI, in Andover, Massachusetts, is at +1-978-684-3600, or at http://www.cmgi.com.

          (Addtitional reporting by Marc Ferranti.)

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